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The Easy Case for Online Sales Taxes

It's usually hard to make a convincing case for higher taxes. Online sales taxes are an exception.

The Senate will soon vote on a bill called the Marketplace Fairness Act that would require online merchants to collect taxes on sales in the 45 states that impose them, effectively raising taxes on many online shoppers who have skirted sales taxes up till now. Congress has debated this issue for years, with consumers basically enjoying an open-ended tax holiday on many online purchases. But bipartisan momentum has been building to make online merchants subject to the same tax rules as regular retail outlets.

No state legislature has ever decided to impose different tax rules on in-store transactions and online purchases. The only reason there's a problem is that most state tax laws came before the Internet and didn't anticipate the extent to which e-commerce would allow people in one state to buy goods from a business in another. The most recent Supreme Court decision relating to the matter dates to 1992, which was before consumer-friendly web browsers even existed.

The result has been a patchwork of tax rules in which a few states are able to collect sales taxes when their residents make online purchases from sites such as Amazon and Wal-Mart, but the majority of e-commerce shoppers pay no sales tax. That gives online merchants an advantage over physical retailers that are required to collect sales taxes. It also represents a loss of about $23 billion in state tax revenue, according to the National Governors Association.

Since online purchases that cross state lines amount to interstate commerce, Congress can pass a law requiring online merchants to collect sales tax comparable to what each state would levy. But opposition to such a measure has been strong enough to prevent it up till now. Tracking tax rates in each of the 45 states with a sales tax wouldn't be that hard, but opponents argue that also tracking several thousand local sales tax rates would place an unfair burden on web-based businesses. Then there's the notorious "candy" conundrum, in which businesses shipping sweets must determine if a given municipality will tax them as food or as typical retail items. That illustrative example is a proxy for the many unpredictable complications in thousands of local sales tax regimes.

Those problems are legitimate, but they're also solvable. Bills in both the House and the Senate would only require businesses with more than $1 million in sales to collect tax, exempting small eBay-type operations and Mom-and-Pop stores. States would have to simplify the structure of their sales taxes before being allowed to collect Internet taxes. Software could help sellers set the right tax rates automatically and states could even be held responsible for keeping tax databases up to date.

Those types of safeguards have converted many past opponents of the online sales tax, including some Republican governors who typically favor low taxes. But opposition remains, mainly among anti-tax groups that object to virtually all taxes on anything. "Big business and big government are uniting to pursue their mutual interest in sticking it to the little guy," the Wall Street Journal thundered in a recent editorial against online sales taxes.

The question, however, isn't whether states should impose sales taxes or not. States have already made that choice. It's whether sales taxes that are already on the books should be apply equally to all purchases, or whether there should be arbitrary distinctions based on the medium in which something is purchased. States impose sales taxes as part of their overall plan to raise revenue (along with taxes on income, property and other things), not as a scheme meant to incentivize one form of commerce over another.

It's also time for legislators to treat the Internet as a mainstream element of the U.S. economy rather than a fragile bit of new technology that needs the protection of special rules. Digital research firm ComScore estimates that e-commerce sales totaled $186 billion in 2012, which is nearly 5 percent of all retail sales. Double-digit growth rates show no sign of slowing. Besides, Internet businesses wouldn't be required to pay new taxes themselves under the proposed law; they'd only be required to collect and remit taxes, the same way brick-and-mortar businesses do.

New sales taxes might compel a few online shoppers to forego online purchases, and shop at the store instead. But they'd pay tax there as well, plus bear the added time and expense of driving. It's a safe bet that even with sales taxes, online shopping will remain an appealing option.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.